Reversion Rights: Will 2013 Be A Game-Changer?

While albums released in 1978 (as shown here) are the first batch eligible for possible reversion of ownership to pass from labels back to the artists, so far the only acts to file notice of termination for master right recordings with the U.S. copyright Office include Pat Bentar, Journey, Devo and Billy Joel.

Although 2013 theoretically is the year that master sound recordings' copyright licenses begin to expire for albums and can revert from labels to the artists, no one is sure what exactly will happen.

According to some artist advocates, the ability to terminate the label's copyright-which was granted in the Copyright Revision Act of 1976 and became effective Jan. 1, 1978-and have it revert to the artist will be cataclysmic for the industry, resulting in a completely reshaped music business.

But label executives insist their companies will be largely unaffected by the law becoming a reality and think it will continue to be business as usual. So for now, it's unclear if master recording copyright reversion will be a big issue for the industry, as artist advocates argue, or another overhyped potential disaster like the Y2K issue turned out to be at the turn of the millennium.

Since there wasn't a federal copyright law for master recordings prior to 1972, most of the debate focuses on albums that were issued after that year. Post-1978, there is a 35-year copyright period that can expire if artists file a termination notice with the U.S. Copyright Office to reclaim the master recordings. For recordings made between Jan. 2, 1972, and Dec. 31, 1977, master recording copyrights have a 56-year life.

In both instances, there is a five-year window to file termination notices. While artists with 1978 recordings had to file their termination notice between 2003 and 2011 in order to reclaim that recording in 2013, they still have until 2016 to file a termination notice that will result in a reclamation in 2018 for that record.

So far, a number of acts including Pat Benatar, Devo, Journey, Billy Joel, Kool & the Gang, Lipps Inc., Roberta Flack and Peabo Bryson have filed with the U.S. Copyright Office for the termination for some or all of the album master rights held by their labels so that it will revert to them. In turn, the major labels and artists have been ignoring such filings, artist managers and artist lawyers say.

In the case of Devo, Kool & the Gang, Journey, Benatar, Blondie and Dan Fogelberg, they appear to have filed notices of termination for their entire catalogs of albums recorded between 1978 and 1988. For some artists, like Joel, Billboard could find only one notice in the U.S. Copyright Office's database, for 52nd Street, and one for the first Toto album.

Adding to the confusion over what will happen was the highly publicized fight between the artist community and the RIAA regarding the insertion of a small provision buried in a 1,740-page bill in 1999 that named sound recordings work-for-hire.

Work-for-hire would mean the musicians were employed by the label and therefore not entitled to reclaim ownership of their work.

That late insertion into the bill was considered a game-changer because the 1976 act named nine exceptions that stop copyrights from reverting to the creators, including if it's a creative work that was made under a work-for-hire agreement. But the 1976 act didn't specifically mention master recordings, so the artist community saw the provision as an amendment to that law that would eliminate master recordings from being eligible to revert to the artists.

While the RIAA claimed that the provision was inserted for a completely different reason and to protect artists, the artist community didn't believe the label trade group and went ballistic. As a result, the 1999 provision was replaced by a new, carefully worded ordinance that set the clock back to where it was before the 1999 insertion.

In other words, there was already a fierce debate in 1999, and prior to that, over whether sound recordings qualify as a work-for-hire creation. That debate still rages today.

"The issue is a complex one, and ultimately, this is an area where case law and business practices are still developing," says Elliott Resnick, an associate with Shukat Arrow Hafer Weber & Herbsman.

"It's kind of a jump ball at this moment," one artist manager says. While artists have sent termination notices to their labels, "there is a complete wall of silence from the labels," he adds.

Since some artist lawyers think that any lawsuits concerning this issue will be settled in their favor, they are choosing venues where they think the courts will agree with their position and result in legal precedent. But that route will need a party or person with deep pockets to finance this type of lawsuit, as the fight is expected to continue for a while.

It's worth noting that on the publisher side, there isn't a work-for-hire provision for the most part, so once a publisher checks the paperwork, the songwriter often gets his ownership back. Moreover, most publishers are managing to retain those works, even if it's at a reduced profit rate. "Its hard to get pole position over the publisher in place," one music publisher says.

While individual songs are also eligible for termination and reversions, those songs will probably be reclaimed as albums rather than on a song-by-song basis because the song revenue in most cases won't be enough to sustain the initial lawsuits that will decide this debate, lawyers point out.

At the heart of the dispute, most artist contracts say that the sound recording is a work-for-hire, but the key will be proving that in court, attorneys on both sides claim.

Some lawyers think it's clear-cut. "If you look at these past artist-label negotiations from a neutral perspective, the parties to these agreements always intended sound recordings to be considered a work-for-hire," says Eric German, a partner at Mitchell Silverberg & Knupp who specializes in entertainment litigation and intellectual property and technology. "That's why the agreements use that language."

One example of the nine exceptions where copyright terminations may not apply is films. Since a movie can be said to have many creators, it is thus viewed as a collective work not eligible for copyright termination. Some argue that albums can also be viewed as a collective work since in addition to the band, there likely is a producer and possibly outside songwriters and musicians involved in creating the recording.

But Bob Donnelly, a lawyer with Lommen Abdo who was heavily involved in the 1999-2000 work-for-hire dispute, says, "It's a stretch if they will be able to squeeze a typical recording into a collective work. Collective works were created to cover things like an encyclopedia. It strains credulity to try and say sound recordings are collective works." OSTRICH STRATEGY

At this point, it's not certain if the major labels will eventually relent and acknowledge the termination notices or if they will make every artist who files such a notice fight for that right in court. For whatever reason, some suggest the labels are hesitant to risk a losing court fight, and would rather negotiate with artists to settle the rights coming up for reversion.

"This whole issue is definitely not settled, and I don't think anybody wants to have a lawsuit about this," lawyer Chris Castle of Christian L. Castle Attorneys says. "I don't think either side wants to take a chance and lose. The labels and artists will settle this on a case-by-case basis."

Once the artist sends a termination notice, the label has an exclusive right in between the filing of the notice and the expiration to make a deal for a subsequent period, says a business affairs executive at one label. "There are a lot of levers at our disposal that the record labels can employ in a negotiated settlement in order to retain those rights," the executive says. "We can offer a higher royalty rate for the expiring copyright, and we can sweeten the pot by offering to pay a higher royalty rate for albums that have not yet hit the 35-year point, and we can offer a higher royalty rate on records outside the U.S." And don't forget big advances, too.

"Sure, profit margins will be less," the executive adds, "but record companies will likely end up keeping those rights because of the leverage they can bring to negotiations."

Another reason why albums will likely remain with the labels that house them is that after 35 years, not many of them produce a significant amount of revenue, so their value may not be worth the anticipated expense of a court fight.

Since the complexity for the potential legal proceedings that will be needed to clarify how the 1976 copyright law will be interpreted, "some artists are sending termination notices, but are picking later dates, such as 2018, to see how everything shakes out," the major-label executive says. In other words, those artists don't want to engage in possibly expensive lawsuits, and would rather terminate their copyrights after legal precedent has been established so that in case they have to go to court, they would pay a more reasonable amount to win in court rather than taking on pricey, precedent-setting lawsuits.

Will there be lawsuits over this issue? Some artists don't care about a higher royalty rate and when their deal expires, there will be litigation "because they are taking an extreme position, but I expect that will be the exception and not the rule," the business affairs executive says.

Who will fight in court to get their masters back? "I suspect it will be only the top 5% of artists," the executive says.

Since there is risk on both sides, the 35-year termination rule is the kind of situation where deals will get worked out, the business affairs exec predicts. At the end of the day, the copyright termination issue "will end up being an ordinary course-of-business event," he adds.

Another label executive predicts that if artists win reversion of their masters, they will eventually wind up selling those rights back to their labels because they don't have the means to exploit those rights. "If you think about it, it is time-consuming to pitch music for film and TV, and artists usually don't have that kind of staffing," another major-label executive says. "Nor do they have the expertise to store their masters and tapes. The whole thing can get very messy."

On the other hand, Donnelly thinks heritage acts have nothing to gain by staying with their labels, especially with the transition to digital models. "There was a time when you might need a label to get your album into 10,000 stores, but now you only have to go to the Orchard, CD Baby or TuneCore and pay a small fee and get your music up everywhere."

Finally, the business affairs executive claims that even if all artists terminated their agreements with their labels, it's still not going to make a significant economic difference to labels. That's because most artists will return to a label, so even if one major loses 10 acts it's likely to pick up 10 others who have won reversion rights to their albums from another major. "Most artists will prefer the services provided by a larger company," he says.

And even if the masters revert successfully to the artist, there's still the original legacy artwork, which is clearly commissioned as a work-for-hire by the record companies.

Until the smoke clears on all the areas of potential disputes concerning master rights termination and reversions, "ultimately, this issue will wind up making for a really interesting couple of years," one major-label executive says. ••••